western wood products, inc. v. western pellet products, llc

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

In re: WESTERN WOOD PRODUCTS, INC., No. 11-12-10057 JS A Wyoming profit corporation, Debtor.

WESTERN WOOD PRODUCTS, INC., A Wyoming profit corporation, Plaintiff, v. Adversary No. 12-1172 J WESTERN PELLET PRODUCTS, LLC, Defendant.

MEMORANDUM OPINION

THIS MATTER is before the Court following a two-day trial on the merits held February

28 and March 1, 2013. For purposes of trial the Court consolidated this adversary proceeding

with the Debtor’s Motion to Reject Contract and Unexpired Lease with Western Pellet Products,

LLC (the “Motion to Reject”).1 William F. Davis appeared at trial on behalf of Western Wood

Products, Inc. (“Western Wood”). William R. Keleher and Spencer L. Edelman appeared at trial

on behalf of Western Pellet Products, LLC (“Pellet Products”).

Western Wood and Pellet Products are parties to: 1) a supply agreement for the sale by

Western Wood to Pellet Products of wood by-product material produced by Western Wood in

the operation of its sawmill; and 2) a lease of real property by Western Wood to Pellet Products

on land adjacent to the sawmill. Western Wood contends that Pellet Products has defaulted

under the supply agreement and the lease, and is in breach of the supply agreement and lease.

Western Wood seeks to reject both the supply agreement and the lease in connection with its

1The Motion to Reject is filed as Docket No. 34 in Case No. 11-12-10057. The order consolidating the Motion to Reject with the trial in this adversary proceeding is filed as Docket No. 108 in Case No. 11-12-10057.

Case 12-01172-j Doc 30 Filed 04/04/13 Entered 04/04/13 16:45:32 of 40

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Chapter 11 bankruptcy case.2 Pellet Products denies that it failed to perform under the supply

agreement, denies that it is in violation of the lease, and asserts that Western Wood breached the

supply agreement. Pellet Products intends to exercise its rights under 11 U.S.C. §

365(h)(1)(A)(ii) and remain in possession of the real property for the remainder of the term

under the lease.

After consideration of the evidence presented at trial, and being otherwise sufficiently

informed, the Court finds that 1) Pellet Products is not in default under the terms of the supply

agreement or the lease and has not breached the supply agreement or lease; 2) Western Wood

breached the supply agreement; and 3) Pellet Products is entitled to damages in the event

Western Wood rejects the supply agreement and lease. Because the Motion to Reject was

premised on Western Wood’s belief that Pellet Products was in breach of the supply agreement

and in default under the lease, the Court cannot now make a determination as to whether Western

Wood properly exercised its business judgment in seeking to reject the supply agreement and the

lease. The Court will set a further evidentiary hearing on the Motion to Reject if Western Wood

still wishes to reject the supply agreement and lease.

BACKGROUND AND FACTS

Western Wood owns and operates a sawmill near Raton, New Mexico. It has

approximately fifty employees. Ray Levengood is the president of Western Wood, and has been

since its inception about twenty years ago. Western Wood started construction of its New

Mexico sawmill operation in 2003. It began operating in 2004. It obtains most of its timber

2 Western Wood also raised the following matters: 1) which fixtures built by Pellet Products are part of the real estate; and 2) whether Pellet Products violated the automatic stay under 11 U.S.C. § 362(a)(3) by continuing to remove wood by-product material post-petition. See Pre-Trial Order, pp. 6-7 (Docket No. 24). The complaint filed in this adversary proceeding included a request for permanent injunction. See Complaint for Breach of Contract, Violation of the Automatic Stay, and for Permanent Injunction (Docket No. 1). At trial, counsel for Western Wood stated that Western Wood no longer seeks injunctive relief.


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from Vermejo Park Ranch LLC. From the timber, Western Wood manufactures fence posts and

poles. Western Wood generates wood by-product material, consisting of wood chips and

sawdust, from the operation of the sawmill. Initially, Western Wood sold its wood by-product

material wherever it could, but as production increased, Western Wood needed to secure a year-

round cash flow and steady market for its wood by-product material. Western Wood produces

approximately 40 tons per day of wood by-product material. Western Wood has an air quality

exemption from the State of New Mexico for the operation of its sawmill.3

Sometime before 2007, Pellet Products was formed for the purpose of starting a wood

pellet manufacturing operation adjacent to Western Wood’s sawmill. Pellet Products

contemplated using the wood by-product material from Western Wood to manufacture wood

burning stove pellets. Roger Terry formed Pellet Products. He solicited and obtained $800,000

from investors to start up Pellet Products’ business. Roy Pillmore and Mr. Levengood were

among the original investors. However, Mr. Levengood did not contribute any money for the

formation of Pellet Products or in exchange for his equity interest. Instead, he funded his

investment with by-product material supplied by Western Wood either at no charge or at a

reduced charge. For the first two years of its existence, Mr. Levengood was a member of the

board of Pellet Products. He left the board of Pellet Products in 2009.

Western Wood and Pellet Products entered into a Long Term Lease Agreement (the

“Lease”) on March 31, 2007. See Exhibit 2 and Exhibit C. Under the Lease, Western Wood

leased to Pellet Products a 2.56 acre parcel of land located next to the sawmill. The Lease is a

ninety-nine (99) year lease beginning March 1, 2007 and ending December 31, 2106, with an

annual rental amount of $100, payable on February 1st of each year. Id. The Lease also includes

3Pellet Products does not have an air quality permit, and it is not clear from the evidence whether Pellet Products is covered by Western Wood’s exemption.


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the following terms: 1) Pellet Products is responsible for payment of “all utilities on the premises

. . . including . . . gas, water, electricity, heat, garbage and sewer collection”; 2) Pellet Products

will build a factory and facilities on the leased premises for the purpose of manufacturing wood

pellet products and other related wood products and services; 3) “[a]ll fixtures built by [Pellet

Products] except the buildings, shall not merge with the real estate, but shall remain the property

of [Pellet Products]”; 4) Pellet Products will “not use the premises during the term hereof for any

purposes contrary to the laws of the State of New Mexico or the United States”; 5) if the Lease

is terminated, Pellet Products has six months within which to remove the fixtures; and 6) Pellet

Products must maintain a liability insurance policy and a $1,000,000 policy insuring the plant

and the property, listing Western Wood as an additional insured to be kept in full force and effect

during the Lease term. Id. The Lease also requires Pellet Products to perform all of its

obligations under the supply agreements described below. See Exhibit 2. Ray Levengood signed

the Lease on behalf of Western Wood, and Roger Terry signed the Lease on behalf of Pellet

Products. Id. Mr. Levengood does not remember when or if Pellet Products paid rent in 2008,

2009, or 2010 because his primary focus at that time was to get the plant running. He does recall

that Pellet Products delivered a check to Western Wood for the 2012 rent, and that the 2013 rent

was paid by check sent by registered mail.

On March 22, 2007, Western Wood and Pellet Products entered into a supply agreement

(the “First Supply Agreement”). Mr. Levengood signed the First Supply Agreement on behalf of

Western Wood, and Roger Terry signed the First Supply Agreement on behalf of Pellet Products.

See Exhibit 1 and Exhibit B. The First Supply Agreement is a one-page document that contains

the following provisions:

Western Wood Products Inc. (the Supplier) will supply Western Pellet Products LLC (the Producer) all of the waste products that are chips or materials available to be chipped as a


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result of operations of the Supplier. The Supplier may withhold materials to fulfill the current contractual obligation with Zeager Brothers and Silver Dollar shavings.

The Producer will purchase the materials as listed in paragraph one at the rate of thirty

dollars per dry ton ($30.00) for the first five years. The Producer will receive all of its supply for the production of wood pellets from the

Supplier. In the event the Producer is unable to obtain an adequate volume of waste material from the Supplier then the Producer may request the Supplier to obtain additional materials at a price and volume agreeable in writing by both parties. Any variation of this agreement will require written authorization from both parties.

First Supply Agreement, ¶¶ 1, 2, and 4. The First Supply Agreement provided that Western Wood would provide the first 12,000 tons of

wood by-product material to Pellet Products “in lieu of cash for 360,000 shares of stock” in

Pellet Products. First Supply Agreement, ¶ 3. Under this arrangement, Mr. Levengood would

obtain an equity interest in Pellet Products. Id. The First Supply Agreement also contemplated

that the price for by-product materials could increase by up to 5% after the first five years, and

that, if the cost of business dramatically increased due to circumstances beyond the parties’

control causing a hardship on either party, the parties would negotiate a new price. Id. at ¶ 5.

Pellet Products anticipated that during the first five years of operation under the First Supply

Agreement Pellet Products would complete its start-up phase and achieve full production. A

document used to solicit the initial investment in Pellet Products estimated full production to be

within three years. See Exhibit A (“As much as 40 tons can be shipped daily when the plant

reaches full operation increasing over the next three years to 80 – 100 tons per day.”).

Pellet Products began construction of its pellet plant in the spring of 2007.

It began production some time in 2008. To create its products, Pellet Products picks up the wood

by-product material from Western Wood. The wood by-product material is entered into a feed

hopper and gets screened for the purpose of classifying the material into different size particles.


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Some of the material is sent to the grinder to get resized. Then the material goes to the dryer,

and the drying bin. Ultimately, the material is run through the pellet mill which creates the

pellets through a machine that presses the material and extrudes the finished pellet product. The

dryer is fueled by burning Western Wood’s sawdust that is part of the by-product material Pellet

Products purchases from Western Wood.

The equipment Pellet Products initially purchased was used and was not in great working

condition. Pellet Products has one large pellet mill and one small pellet mill. Some components

that Pellet Products originally purchased for the mills were improperly sized. Pellet Products

had difficulties ramping up production and getting its business profitable. Often Pellet Products

was short of cash needed to purchase parts that would break down on its production line, creating

a “parts on shelf” problem that inhibited its productivity. Pellet Products did not have sufficient

cash on hand to keep replacement products on the shelf, including a custom-made critical part, a

die, which could take up to two weeks to receive after it was ordered. The vendor for the die

eventually required Pellet Products to pay cash in advance. Pellet Products conducted two

recapitalization efforts to obtain additional funds from its investors in an attempt to address this

and other problems. Including the initial investment and subsequent recapitalization efforts,

Pellet Products raised approximately $2 million.

Sometime after Pellet Products began production, Western Wood and Pellet Products

verbally agreed, as a concession to Western Wood, that Pellet Products would pay Western

Wood for wood by-product material until the first 12,000 tons of wood by-product material had

been supplied at the rate of $15.00 per dry ton plus a reduced equity share in Pellet Products,

instead of Western Wood supplying such product without charge in exchange for equity in Pellet

Products. This adjustment was made at the request of Western Wood at a time when Western


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Wood and Pellet Products both were experiencing cash flow difficulties. Mr. Pillmore testified

that Pellet Products agreed to this change even though it would reduce Pellet Products’ cash

situation because it had been Pellet Products’ belief from the outset that the success of Western

Wood was tied to the success of Pellet Products and that the two companies had a “symbiotic”

relationship.

Western Wood and Pellet Products re-negotiated the First Supply Agreement in

September of 2009, and entered into another supply agreement (the “Second Supply

Agreement”). See Exhibit 3 and Exhibit F. The one-page Second Supply Agreement consists in

its entirety of the following terms:

1. Western Wood Products Inc[.] (the Supplier) will supply Western Pellet Products LLC (The Producer) all of the waste products that are chips or materials available to be chipped as of a result of operations of the Supplier. Western Wood Products reserves the right to sell any materials deemed unusable or agreed upon overstock by Western Pellet Products plant manager.

2. The Producer will purchase the materials as listed in paragraph one at a rate of thirty dollars per dry ton ($30.00) for the first three years. $30.00 per dry ton is the rate established for the Bi-Products generated by manufacturing of post and poles material. Any other source of chips or raw material beyond that of the bi-product stream will be negotiated on a case by case bases [sic.] these materials will be paid for on a negotiated schedule.

3. The Producer will receive all of its supply for the production of wood pellets from

Supplier. In the event the Producer is unable to obtain an adequate volume of waste material from the Supplier then the Producer may request the Supplier to obtain additional material at a price and volume agreeable in writing by both parties. Not to exceed 10% of suppliers costs considering moisture and fuel. Any variation of this agreement will require a written authorization form both parties.

4. Materials supplied by the Supplier (with the exception of non bi-product materials)

may increase in price after the first three years to a level equal to the increased cost of business but not to exceed five percent (5%) per year. In the event the cost of business dramatically increases due to uncontrollable circumstances that create a hardship on the Supplier or the Producer, both parties will agree upon a negotiated price in writing.


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5. This agreement will survive the sale of either business entity unless otherwise agreed upon in writing. Second Supply Agreement, ¶¶1 – 5.

The three-year period reflected in the Second Supply Agreement is the period of time then

remaining under the First Supply Agreement as of the date of the Second Supply Agreement.

Neither Western Wood nor Pellet Products were represented by counsel during the

negotiation of the Lease, the First Supply Agreement or the Second Supply Agreement. No

other written agreements between Western Wood and Pellet Products for the sale of wood by-

product material by Western Wood to Pellet Products were ever made.

Western Wood had an expectation when it entered into the First Supply Agreement and

Second Supply Agreement that after Pellet Products’ startup phase and its ramp up of

production, Pellet Products would produce some 40 tons of wood by-product material per day for

which Western Wood would receive an income stream of approximately $30,000 per month

from the sale of wood by-product material to Pellet Products. Western Wood also had an

expectation that Pellet Products would consume all of Western Wood’s wood by-product

material. Pellet Products never achieved that level of production. Mr. Levengood testified that

from the fall of 2008 through the end of 2011, Pellet Products averaged production and payment

to Western Wood of close to $8,000 per month, though the transaction record for invoices and

payments suggests a somewhat lower figure. See Exhibit 21 and Exhibit W. Western Wood also

expected that payment for a “dry ton” under the First Supply Agreement and the Second Supply

Agreement would be based on a dry ton of Western Wood’s wood by-product material consisting

of chips and sawdust. However, Pellet Products paid Western Wood based on a dry ton of

finished pellet materials. The dry ton of finished pellet materials does not include the wood by-

product material that Pellet Product used for fuel in drying the by-product material, nor by-


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product material wasted as part of the pellet manufacturing process. Western Wood complained

about not being paid for the wood by-product material burned for fuel or wasted in the pellet

manufacturing process. The parties tried but never reached an agreement on how to measure the

dry ton weight of the burned or wasted by-product material. Mr. Levengood acknowledged that

neither party had an adequate measuring system and that it was nearly impossible to track how

much by-product material was supplied to Pellet Products that was burned for fuel or wasted in

the manufacturing process. Mr. Walton, plant manager for Pellet Products, conducted some

studies in an effort to determine the amount of by-product material used to create a dry ton of

finished pellets. Based on his studies, he believes that it takes 8.6 yards of wood by-product

material to produce one ton of finished pellet products. Throughout the period that the parties

conducted business, Pellet Products paid Western Wood based on the weight of its finished

product.

Historically, Pellet Products paid Western Wood between sixty and ninety days after

Pellet Products inventoried its finished pellet product at the end of each month, based on dry tons

of finished product. On occasion Pellet Products’ payments were more than ninety days after

month-end. Mr. Levengood testified that Pellet Products was to pay Western Wood fifteen days

after the end of each calendar month, but he also acknowledged that neither of the supply

agreements included any terms regarding when payments were due. Pellet Products would

review its production report at the end of each month to determine the amount to pay Western

Wood. When Pellet Products first started production, it paid Western Wood based on tons of

finished product Pellet Products shipped to its customers. At the request of Mr. Levengood, that

arrangement changed so that payment was to be made after finished product was produced.


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Pellet Products was never able to achieve the production levels that would require its use

of 40 tons of wood by-product material per day that the parties anticipated when the First Supply

Agreement was made. By late 2009 or 2010 it was clear that Pellet Products would not be

purchasing all of the wood by-product material that Western Wood produced. Mr. Pillmore

testified that he told Mr. Levengood that Western Wood should not hold all the wood by-product

material for use by Pellet Products but that the parties never really discussed the possibility of

Western Wood actually selling the overstock.

Sometime in 2009, Western Wood learned of a government subsidy program it believed

could directly benefit Western Wood and thereby indirectly benefit Pellet Products. To

participate in this program Mr. Levengood believed that he could not hold an interest in Pellet

Products. He transferred his interest in Pellet Products to his sons. Ultimately, Western Wood

decided not to pursue the program, in part because the parties learned that Western Wood would

not be the beneficiary of the program.

In addition to heating fuel pellets, Pellet Products has developed different products,

including a loss circulation material (“LCM”) used for certain applications in the oil and gas

industry; horse bedding pellets; and cat litter.4

On May 18, 2011, Western Wood sent a letter prepared by its attorney to Pellet Products

(the “Letter”). See Exhibit 36. The Letter states that Pellet Products is in violation of the Lease

based on the following: 1) “failing to re-meter the leased premises for water usage by [Pellet

Products], for garbage removal at the expense of [Western Wood] and the non-payment for

consumption of water use by [Pellet Products]” and; 2) failure “to keep in effect a liability

insurance policy insuring the plant and property for $1,000,000 indicating the landlord as an

4Although there is a patent issue with labeling and using the product as LCM, the same product can be used for other applications in the oil and gas industry. Pellet Products has worked with the owners of the patent to establish other applications. Pellet Products now markets the LCM-type material it manufactures as pit remediation material.


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additional insured and loss payee[.]” The Letter also complains of “large contaminated waste

piles" and other “large piles of product[,]” and demands payment for “product stolen by a

previous employee of [Pellet Products] which otherwise could have been sold to other markets.”

The Letter states that Western Wood has elected to terminate the Lease. Finally, the Letter

demands payment due under the Second Supply Agreement, and “deems the [supply] agreement

terminated . .. for failure to utilize all of the supply of material set aside for the production for

wood pellets.”

Mr. Levengood testified that he had asked Mr. Pillmore for documentation of the

insurance policy over the years, but that Pellet Products did not provide him with insurance

documentation. Other than the Letter, Western Wood never sent a written request to Pellet

Products regarding insurance. After Western Wood sent the Letter to Pellet Products, Pellet

Products provided Western Wood with a copy of an insurance policy dated Mary 24, 2011 that

reflects Western Wood as an additional insured. See Exhibit U. Mr. Pillmore testified that upon

receipt of the Letter, he immediately instructed Pellet Products’ manager to contact the insurance

agent to make sure that Western Wood was listed as an additional insured on Pellet Products’

insurance policy. He testified that he believed he had previously requested the insurance

company to list Western Wood as an additional insured. Western Wood has not received a

notice of cancellation of this policy. Pellet Products also put a water meter in and stopped using

Western Wood’s dumpsters.

Before Pellet Products received the Letter, Western Wood had never made Pellet

Products aware that there was an issue with untimely lease payments, water usage or trash. Mr.

Pillmore was aware that Western Wood had complained that Pellet Products wrongfully dumped

waste material onto a pile of by-product material, but he noted that employees of Western Wood


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also dumped trash or dirt on the same pile. Mr. Pillmore testified further that when Pellet

Products hired a new manager, the issue of significant waste of by-product material in

connection with Pellet Products’ manufacturing process was largely eliminated.

In July of 2011, Western Wood sent a letter to Pellet Products stating that Western Wood

“will not be pursuing legal action at this time to break the supply agreement with Western Pellet

Products as the issues of concern have been addressed.” See Exhibit T and Exhibit 37. Western

Wood sent this letter in response to e-mail correspondence from Mr. Pillmore that led Mr.

Levengood to believe that Pellet Products was trying to obtain additional operating capital from

its investors to solve problems that would allow it to ramp of production and pay for larger

quantities of by-product material. Mr. Levengood had hoped to renegotiate a price with Pellet

Products. That did not occur.

In 2007, Western Wood built a pressure treatment plant for the purposes of adding

pressure treated preservative to its fence posts. Western Wood borrowed an additional $2

million from its lender, International Bank, primarily used to build the pressure treatment plant

and a front office. After the pressure treatment plant was built, Western Wood borrowed

approximately an additional $200,000. Western Wood expected to sell all of its pressure treated

fence posts to Forest Products Distributors (“Forest Products”) under a long term supply

agreement, but that did not occur. Western Wood’s dispute with Forest Products over Forest

Products’ obligation to buy pressure treated fence posts, as well as Pellet Products’ inability to

ramp up production, greatly contributed to Western Wood’s financial difficulties.

Western Wood filed a voluntary petition for relief under Chapter 11 of the Bankruptcy

Code on January 9, 2012. Western Wood owes approximately $5.2 million to its secured lender,

International Bank. The monthly debt service on the loan is approximately $35,000. Western


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Wood has had difficulty servicing this debt since 2008. As of the petition date, Pellet Products

owed Western Wood approximately $14,000 for wood by-product material obtained from

Western Wood under the Second Supply Agreement. A portion of this amount is attributable to

pellet production that occurred in February and March of 2011. See Exhibit 21. The last

payment Western Wood received from Pellet Products before the bankruptcy filing was in

December of 2011. Id. Post-petition, Pellet Products paid Western Wood approximately

$18,000 representing prior receivables due to Western Wood under the Second Supply

Agreement. Id. Pellet Products cut a check for payment of rent for 2012 on January 31, 2012.

See Exhibit V.

Recently, Western Wood has negotiated a few contracts for the sale of its by-product

material to other parties. Mr. Levengood testified that Western Wood anticipates revenue from

the sale of its by-product material to parties other than Western Wood of $25,000 to $50,000 per

month. Western Wood’s monthly operating report for January 2013 reflects by-product income

of $25,678.08. See Exhibit WW. Mr. Levengood testified further that he did not seek to secure

sales of excess by-product material to other customers during the time that Pellet Products was

attempting to ramp up its business because Mr. Levengood believed that Western Wood was

obligated under the Second Supply Agreement to provide all of its product to Pellet Products.

He believed that potential buyers would be reluctant to enter into a contract if there was a risk

that the buyers would lose their source in the event Western Wood had to supply Pellet Products

under the Second Supply Agreement. Since the filing of the bankruptcy case, Western Wood’s

pile of wood by-product material has increased significantly.


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Mr. Pillmore testified that sometime near the end of 2011, Pellet Products received an

offer to purchase its business as an ongoing pellet manufacturing plant for $4 million. There is

no evidence that the offer was accepted. No written offer is in evidence.

Pellet Products had a loan secured by its equipment. Several of Pellet Products’ investors

were guarantors for the loan. The guarantors paid off the loan secured by Pellet Products’

equipment. The estimated current value of Pellet Products’ equipment in place is approximately

$800,000. If the equipment had to be sold separately and removed from the site, the estimated

value of the equipment is $400,000.

Pellet Products estimates that it produced approximately 400 tons per month in 2012.

Pellet Products’ goal was to produce 800 tons per month but it never reached that goal. Pellet

Products remains optimistic that it could eventually reach that goal if the Second Supply

Agreement is not rejected. On its most productive days, Pellet Products produced over 50 tons

per day. In its first five years of operation, Pellet Products sustained losses of at least $1.8

million. Sometime in March of 2012, the main bearing on Pellet Products’ large mill broke

down. The cost to replace that part is approximately $6,000 to $7,000.

Also during March of 2012 and continuing into April 2012, representatives of Western

Wood would alternately tell representatives of Pellet Product that Pellet Product could or could

not take wood by-product material from the piles on Western Wood’s sawmill property: one day

Pellet Products would be allowed to remove by-product material, and some days later Pellet

Products would not be allowed to remove by-product material. This went on for some time, but

by mid April 2012, Western Wood permanently cut off supply of the wood by-product material

to Pellet Products. Western Wood dug a trench between the sawmill property and the property

leased to Pellet Products to prevent Pellet Products from coming on to the sawmill property.


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Pellet Products has now ceased operations. Pellet Products timely paid Western Wood the rent

under the Lease for 2013.

DISCUSSION

The Bankruptcy Court looks to applicable state law to construe and interpret contracts.

In re Schott, 282 B.R. 1, 7 (10th Cir. BAP 2002)(citing Butner v. United States, 440 U.S. 48, 55,

99 S.Ct. 914, 59 L.Ed.2d 136 (1979)). The First Supply Agreement and the Second Supply

Agreement were entered into and performed in the state of New Mexico, and neither document

contains a choice of law provision. Consequently, New Mexico law applies.5 The First Supply

Agreement and the Second Supply Agreement, which contemplate the sale of wood by-product

material by Western Wood to Pellet Products, are contracts primarily for the sale of goods as

defined under the Uniform Commercial Code.6 Thus the interpretation and enforcement of the

First Supply Agreement and the Second Supply Agreement are governed by the Uniform

Commercial Code as adopted in New Mexico (the “UCC”).7

Parties may form a contract for the sale of goods under the UCC “in any manner

sufficient to show agreement, including conduct by both parties which recognizes the existence

of such a contract.” N.M.S.A. 1978 § 55-2-204(1)(1993 Repl. Pamp.). “Even though one or

more terms are left open a contract for sale does not fail for indefiniteness if the parties have

intended to make a contract and there is a reasonably certain basis for giving an appropriate

5See In re Rottiers, 449 B.R. 133, 135 (Bankr.D.N.M. 2011)(explaining that, under New Mexico law, when the contract does not contain a choice of law provision, the court applies the “most significant relationship test” described in the Restatement (Second) of Conflict Laws, which includes such factors as the place where the contract was negotiated, the place of performance, and the location of the subject matter of the contract, to determine which state law should be applied). 6“Goods” are defined as “all things . . . which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid . . . ” N.M.S.A. 1978 § 55-2-105 (1993 Repl. Pamp.). 7See Kirkpatrick v. Introspect Healthcare Corp., 114 N.M. 706, 709, 845 P.2d 800, 803 (1992)(a contract primarily for the sale of goods is subject to the UCC); State ex rel. Concrete Sales & Equip. Rental Co., Inc. v. Kent Nowlin Constr., Inc., 106 N.M. 539, 541, 746 P.2d 645, 647 (1987)(finding that purchase order for sale of crushing materials and for the service and manufacture of crushing materials was a sale for goods governed by the UCC).


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remedy.” N.M.S.A. 1978 § 55-2-204(3)(1993 Repl. Pamp.). If there is an ambiguity in the

parties’ agreement, the Court may look to extrinsic evidence to discern its meaning.8 The UCC

also contains “gap-filling” provisions that can supply certain missing terms in an agreement for

the sale of goods.9 Under New Mexico’s UCC,

Terms with respect to which the confirmatory memoranda of the parties agree or that are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented:

(a) by course of performance, course of dealing or usage of trade (Section 55-1-

303 NMSA 1978); and

(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

N.M.S.A. 1978 § 55-2-202 (2009 Cum. Supp.).

The parties’ written agreement may be explained or supplemented under this section based on

the parties’ course of performance, course of dealing, or usage of trade. Bowlin’s, Inc. v. Ramsey

Oil Co., Inc., 99 N.M. 660, 671, 662 P.2d 661, 672 (Ct.App. 1983)(citing the applicable sections

of the UCC). “Course of performance” is defined as:

a sequence of conduct between the parties to a particular transaction to a particular transaction that exists if:

8See, Northwest Cent. Pipeline Corp. v. JER P’ship, 943 F.2d 1219, 1227 (10th Cir. 1991)(applying Colorado law, and finding that where contract governed by UCC contained incomplete language from which conflicting inferences could be drawn, the language was ambiguous and the court could admit extrinsic evidence to explain the parties’ intentions). See also, Mark V, Inc. v. Mellekas, 114 N.M. 778, 782, 845 P.2d 1232, 1236 (1993)(under New Mexico common law regarding contract interpretation, “to determine the meaning of the ambiguous terms, the fact finder may consider extrinsic evidence of the language and conduct of the parties and the circumstances surrounding the agreement, as well as oral evidence of the parties’ intent.”)(citation omitted). However, under the UCC, finding an ambiguity in the language of the agreement is not a precondition to the Court’s consideration of extrinsic evidence of the parties’ conduct after the formation of the agreement to explain or supplement a term contained in the parties’ agreement. See Sicor Ltd. v. Cetus Corp., 51 F.3d 848, 857 (9th Cir. 1995)(applying California’s Commercial Code, and stating that “a substantial quantum of inconsistency or ambiguity in a contract for the sale of goods is not a prerequisite to consideration of the parties’ subsequent conduct.”). 9See, e.g., N.M.S.A. 1978 § 55-2-305 (1993 Repl. Pamp.)(price); N.M.S.A. 1978 § 55-2-308 (1993 Repl. Pamp.)(place for delivery); N.M.S.A. 1978 § 55-2-309 (1993 Repl. Pamp.)(time for shipment or delivery).


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(1) the agreement of the parties with respect to the transaction involves

repeated occasions for performance by a party; and

(2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.

N.M.S.A. 1978 § 55-1-303(a) (2009 Cum. Supp.). “Course of dealing” relates only to conduct between the parties to the agreement that

occurred before the parties entered into the agreement. See N.M.S.A. 1978 § 55-1-303 (2009

Cum. Supp.)(Comment 2.)(“‘Course of dealing,’ as defined in subsection (b), is restricted,

literally, to a sequence of conduct between the parties previous to the agreement.”).

“Usage of trade” is defined as:

any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.

N.M.S.A. 1978 § 55-1-303(c)(2009 Cum. Supp.).

Wherever reasonably possible, the express terms of the agreement, the parties’ course of

performance in carrying out the agreement, the parties’ past course of performance, and usage of

trade should be construed so that they are consistent with each other. N.M.S.A. 1978 § 55-1-

303(e)(2009 Cum. Supp.). If such construction is not possible, the Court must give the express

terms of the agreement greater weight than course of performance, course of dealing and usage

of trade; course of performance greater weight than course of dealing and usage of trade; and

course of dealing greater weight than usage of trade. N.M.S.A. 1978 § 55-1-303(e)(1) –

(3)(2009 Cum. Supp.).10

10 Section 55-1-303(e) provides:


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Evidence of the parties’ course of performance “is admissible to construe ambiguous

terms in the contract, or to add to terms that are already in the contract, even when such terms

would be inconsistent with the written language of the contract.” Guidance Endodontics, LLC v.

Dentsply Int’l Inc., 2009 WL 3672452, *4 (D.N.M. Oct. 2, 2009)(unreported)(citing 3 R.

Duesenberg, H. Gabriel, W. Henning, Sales & Bulk Transfers Under the UCC

§4.08[b][i](Matthew Bender 2009)). See also, N.M.S.A. 1978 § 55-1-303(d)(2009 Cum.

Supp.)(“A course of performance . . . is relevant in ascertaining the meaning of the parties’

agreement, may give particular meaning to the specific terms of the agreement and may

supplement or qualify the terms of the agreement.”); Henry D. Gabriel & Linda J. Rusch, The

ABCs of the UCC (Revised) Article 2: Sales, 31 (Amelia H. Boss, ed. 2004)(“Contract terms can

be implied through the parties’ course of performance.”). Course of performance can also be

relied upon to demonstrate a waiver or modification of any term in the parties’ agreement that is

inconsistent with the parties’ course of performance. See N.M.S.A. 1978 § 55-1-303(f)(2009

Cum. Supp.)(subject to certain exceptions11, “a course of performance is relevant to show a

waiver or modification of any term inconsistent with the course of performance.”). Courts may

also rely upon the common law to supplement, but not to contradict, provisions contained in the

UCC. See N.M.S.A. 1978 § 55-1-103(b)(2009 Cum. Supp.)(“Unless displaced by the particular

(1) express terms prevail over course of performance, course of dealing and usage of trade; (2) course of performance prevails over course of dealing and usage of trade; and (3) course of dealing prevails over usage of trade.

N.M.S.A. 1978 § 55-1-303(e)(1) – (3)(2009 Cum. Supp.). 11See N.M.S.A. 1978 § 55-2-201 (1993 Repl. Pamp.) (requiring a writing to satisfy the statute of frauds with respect to a contract for the sale of goods); N.M.S.A. 1978 § 55-2-209(3)(1993 Repl. Pamp.)(requiring a modification to a contract for the sale of goods to satisfy the statute of frauds with respect to a contract for the sale of goods); N.M.S.A. 1978 § 55-2A-208 (1993 Repl. Pamp.)(regarding modification, rescission and waiver with respect to leases governed by the UCC).


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provisions of the Uniform Commercial Code, the principles of law and equity, including . . . the

law relative to . . . estoppel . . . supplement its provisions.”).12

A. The Second Supply Agreement

The Second Supply Agreement is a one-page document that contains incomplete and

internally inconsistent terms. For example, language in the Second Supply Agreement appears

to require both that Western Wood supply to Pellet Products all of the wood by-product material

resulting from its sawmill operation and that Pellet Products need only purchase the amount of

wood by-product material it needs to manufacture its products. The Second Supply Agreement

further provides that “Western Wood Products reserves the right to sell any materials deemed

unusable or agreed upon overstock by Western Pellet Products plant manager.” See Second

Supply Agreement, ¶ 1. Other examples are the Second Supply Agreement’s inclusion of a

price term, but omission of when payments are to be made; and the inclusion of a pay weight

term, but omission of how a dry ton of by-product material supplied by Western Wood is to be

measured. Because of these internal inconsistencies and omissions, the Court will look to

extrinsic evidence, including the parties’ course of performance, in order to ascertain the

meaning of the Second Supply Agreement and to imply additional terms that are not inconsistent

with the terms in the Second Supply Agreement.13

Western Wood asserts that Pellet Products has breached the Second Supply Agreement

based on the following: 1) failure to purchase required quantities of wood by-product material;

2) failure to provide Western Wood with satisfactory monthly production reports and accounting;

12Santa Fe Custom Shutters & Doors, Inc. v. Home Depot U.S.A., Inc., 137 N.M. 524, 535, 113 P.3d 347, 358 (Ct.App. 2005)(applying the express provisions of the UCC rather than common law principles where the UCC contains a comprehensive section dealing with the matter at issue). 13Cf. Northwest Cent. Pipeline, 943 F.2d at 1226 (determining that the court properly determined that the contracts were not intended as the complete and exclusive statement of the terms of the agreement, and properly admitted extrinsic evidence to imply a consistent additional term).


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3) failure to pay for by-product material in billed and unbilled amounts; 4) failure to timely pay

for wood by-product material; 5) failure to weigh the wood by-product material removed from

Western Wood’s property for use in the pellet mill; and 6) removal of material without

permission from Western Wood. These alleged breaches can be categorized in terms of the

following: required quantity of material to be purchased and sold; payment terms; method of

measuring the amount of wood by-product used by Pellet Products for which payment is due (the

“Pay-weight Measurement”); and miscellaneous breaches. The Court will discuss each category

separately.

Quantity: 1) failure to purchase required quantities of wood by-product material; and 2) failure to provide Western Wood with satisfactory monthly production reports and accounting The Second Supply Agreement contains the following terms regarding the required

quantity of wood by-product material to be supplied and purchased:

Western Wood Products Inc[.] (the Supplier) will supply Western Pellet Products LLC (the Producer) all of the waste products that are chips or materials available to be chipped as a result of operations of the Suppler. Exhibit 3, ¶ 1. The Producer will purchase the materials as listed in paragraph one . . . . Exhibit 3, ¶ 2.

This is a typical provision in an “output” contract for the sale of goods under which the buyer

agrees to purchase all of the seller’s good faith output of the specified goods during a certain

period at an agreed price in exchange for the seller’s promise to sell all of such goods exclusively

to the buyer.14

The Second Supply Agreement provides further:

14“In an output contract, the quantity of goods to be delivered under the contract is governed by the seller's good faith output.” Griffith v. Clear Lakes Trout Co., Inc., 146 Idaho 613, 621, 200 P.3d 1162, 1170 (Idaho 2009)(citation omitted).


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The Producer will receive all of its supply for the production of wood pellets from the Supplier. Exhibit 3, ¶ 4.

This is a typical provision in a “requirements” contract for the sale of goods under which the

seller promises to supply all the specified goods the buyer may need during a certain period at an

agreed price in exchange for the buyer’s promise to obtain all goods it requires exclusively from

the seller. 15

The UCC recognizes both “output” and “requirements” contracts that do not specify the

exact quantity of goods to be purchased under an agreement for the sale of goods. See N.M.S.A.

1978 § 55-2-306 (1993 Repl. Pamp.)(“A term which measures the quantity by the output of the

seller or the requirements of the buyer means such actual output or requirements as may occur in

good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the

absence of a stated estimate to any normal or otherwise comparable prior output or requirements

may be tendered or demanded.”).

Paragraph one of the Second Supply Agreement also includes the following provision:

Western Wood Products reserves the right to sell any materials deemed unusable or agreed upon overstock by Western Pellet Products plant manager. Exhibit 3, ¶ 1.

These provisions suggest that the Second Supply Agreement is a hybrid between a

“requirements” contract and an “output” contract.

15“A ‘requirements’ contract is generally defined as a contract in which the seller promises to supply all the specific goods or services which the buyer may need during a certain period at an agreed price in exchange for the promise of the buyer to obtain his required goods or services exclusively from the seller. Although the buyer does not agree to purchase any specific amount, the requisite mutuality and consideration for a valid contract is found in the legal detriment incurred by the buyer in relinquishing his right to purchase from all others except from the seller.” Propane Indus., Inc. v. General Motors Corp., 429 F.Supp. 214, 218 (D.C.Mo. 1977)(citations omitted). See also BRC Rubber & Plastics, Inc. v. Continental Carbon Co., 876 F.Supp.2d 1042, 1050 (N.D.Ind. 2012)(“‘A requirements contract is one in which the purchaser agrees to buy all of its needs of a specified material exclusively from a particular supplier, and the supplier agrees, in turn, to fill all of the purchaser's needs during the period of the contract.’”)(quoting Zemco Mfg., Inc. v. Navistar Int’l Transp. Corp., 186 F.3d 815, 817 (7th Cir. 1999)(quoting Ind.-Am. Water Co. v. Town of Seelyville, 698 N.E.2d 1255, 1259 (Ind.Ct.App. 1998)(additional internal quotation marks omitted)).


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In construing the Second Supply Agreement, each of these terms must be construed

together as a whole. Nearburg v. Yates Petroleum Corp., 123 N.M. 526, 536, 943 P.2d 560, 570

(Ct.App. 1997)(“In interpreting a contract, the court must consider the contract as a whole and

give significance to each part.”)(citations omitted).16 Here, even though the first sentences in

paragraphs 1 and 2 of the Second Supply Agreement indicate that Western Wood must supply all

of its wood by-product material to Pellet Products and Pellet Products must buy all the by-

product material from Western Wood, the second sentence allows Western Wood to sell “agreed

upon overstock” to third parties. Exhibit 3, ¶ 1. Paragraph 3 requires Pellet Products to

purchase its wood by-product material only from Western Wood, but does not specify any

minimum quantity that Wood Products must purchase.

Under the UCC, the quantity under an output or requirements contract where no

estimated quantity is stated means actual output or requirements as may occur in good faith,

“except no quantity unreasonably disproportionate . . . to any normal or otherwise comparable

prior output or requirements may be tendered or demanded.” N.M.S.A. 1978 § 55-2-

306(1)(1993 Repl. Pamp.).17 Here, no estimated requirements quantity is stated in the Second

16See also Krieger v. Wilson Corp., 139 N.M. 274, 279, 131 P.3d 661, 666 (Ct.App. 2005)(“‘A contract must be construed as a harmonious whole, and every word or phrase must be given meaning and significance according to its importance in the context of the whole contract.’”)(quoting Aspen Landscaping, Inc. v. Longford Homes of N.M., Inc., 135 N.M 607, 92 P.3d 53 (Ct.App. 2004)(additional internal quotation marks and citation omitted)). Cf. Kirkpatrick, 114 N.M. at 711, 845 P.2d at 805 (“When determining whether or not a contract is ambiguous, the court must consider the contract as a whole.”)(citation omitted). 17See also Northern Natural Gas Co. v. Conoco, Inc., 986 S.W.2d 603, 608 (Tex. 1998)(“Nothing requires the seller in an output contract to have any output, and nothing requires the buyer in a requirements contract to have requirements. On the other hand, parties to output/requirements contracts are required to exercise good faith in determining outputs or requirements, as well as accept the concomitant risk that their counterparts to the contract may make good faith variations . . .”)(citations omitted). When an output or requirements contract contains a stated estimate, many courts hold that, consistent with Section 2-306 of the Uniform Commercial Code, any good faith increases or decreases from estimated quantities under a requirements contract are permissible. See, e.g., Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333 (7th Cir. 1988); Brewster of Lynchburg, Inc. v. Dial Corp., 33 F.3d 355, 364 (4th Cir. 1994)(recognizing that, so long as the buyer does so in good faith, the buyer “may reduce its requirements to any amount, including zero”)(citations omitted); Atlantic Track & Turnout Co. v. Perini Corp., 989 F.2d 541 (1st Cir. 1993). Some courts hold that unreasonably disproportionate good faith decreases, but not unreasonably disproportionate increases from estimated quantities under a requirements contract are permissible. See, Simcala, Inc. v. American Coal Trade, Inc., 821 So.2d 197, 202-203 (Ala. 2001)(surveying the case law).


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Supply Agreement. Both Western Wood and Pellets Products knew that Pellet Products would

require some time to start up its manufacturing process and become productive. At the time the

parties entered into the Second Supply Agreement, Western Wood knew that Pellet Products was

continuing to have numerous problems that adversely affected production, including inadequate

funds to properly maintain its the equipment and to buy critical replacement parts. Even after

more than a year of operations, Pellet Products still had not come close to the production levels

initially anticipated in 2007, though Pellet Products continued to improve its process and

increase production over time.

The evidence indicates that Pellet Products’ equipment has the capacity to produce 640

tons of pellets per month, but that Pellet Products has never achieved a 640 tons-per-month

production level. Reports from November 2011 through January 2012 reflect that Pellet

Products produced between 293 and 438 tons per month, resulting in payments due to Western

Wood of $3,390.00 for 293 tons produced and $8,343 for 438 tons produced. See Exhibit 23. In

contrast, Western Wood expected the Second Supply Agreement to generate $30,000 per month.

Western Wood’s expectations with respect to the quantity of wood by-product material

Pellet Products would purchase under the Second Supply Agreement do not establish the

quantity Pellet Products was required to purchase under the Second Supply Agreement. But

based on the language in the Second Supply Agreement, the parties’ course of dealings with

respect to the First Supply Agreement as it relates to the formation of the Second Supply

Agreement, and the parties’ course of performance with respect to the Second Supply

Agreement, the Court can determine the required quantity as agreed between the parties.

During the term of the First Supply Agreement, Western Wood was continually frustrated

because it had by-product material to sell well in excess of Pellet Products’ requirements.


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Western Wood could not commit to sell the excess by-product material under a long term supply

agreement with another party because of its commitment to supply the wood by-product to Pellet

Products. Pellet Products was fine with Wood Products selling by-product material to others but

only so long as Pellet Products’ requirements were met. These dual concerns led to the inclusion

of a new provision in the Second Supply Agreement. The Second Supply Agreement added the

following language not contained in the First Supply Agreement:

Western Wood Products reserves the right to sell any materials deemed unusable or agreed upon overstock by Western Pellet Products plant manager. Exhibit 3, ¶ 1.

This provision qualified the output term in the Second Supply Agreement by permitting Western

Wood to sell its output of by-product material in excess of Pellet Products’ requirements, the

“overstock”, to third parties.

The Second Supply Agreement also contains the following provision: In the event the Producer is unable to obtain an adequate volume of waste material from

the Supplier then the Producer may request the Supplier to obtain additional material at a price and volume agreeable in writing by both parties. Not to exceed 10% of suppliers costs considering moisture and fuel. Any variation of this agreement will require a written authorization form both parties. Exhibit 3, ¶ 1. The parties have a duty to each other to act in good faith with respect to each party’s

performance and enforcement of the Second Supply Agreement. See N.M.S.A. 1978 § 55-1-304

(Cum. Supp. 2009)(“Every contract or duty within this act [this chapter] imposes an obligation of

good faith in its performance or enforcement.”). Based on the mutual good faith requirement,

the express language of the Second Supply Agreement regarding quantity terms, and the parties’

course of dealing that led up to the execution of the Second Supply Agreement, the Court finds

that Western Wood has the right to require Pellet Products to either commit to purchase a certain

amount of by-product material or consent to Western Wood’s sale of its wood by-product


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material in excess of the quantity Pellet Products will commit to purchase to the extent necessary

for Western Wood to sell the excess (the overstock) in a commercially reasonable manner. The

Second Supply Agreement requires Western Wood to initiate conversations with Pellet Products’

plant manager to obtain his consent to allow Western Wood to sell the overstock after making

good faith disclosure of its ability to actually sell the overstock to others and on what terms,

including the proposed duration of any contract. Pellet Products’ plant manager is required to

give such consent in good faith consistent with the good faith realistic foreseeable quantity

requirements of Pellet Products, taking into account the needs of Western Wood to sell the

overstock to others in a commercially reasonable manner under supply agreements for

reasonable durations. If it turns out that Pellet Products’ requirements are greater than the

material Western Wood has available to supply it due to Western Wood’s commitments to other

customers, then the Second Supply Agreement allows Pellet Products to request Western Wood

to obtain additional material at a price and volume agreeable in writing by both parties, not to

exceed 10% of Western Wood’s costs of obtaining such material considering moisture and fuel.

If such a request is made, Western Wood has the obligation to use good faith efforts to obtain

such material at a reasonable cost.

However, based on Pellet Products’ historical production levels, the parties’ course of

performance, and the express terms of the Second Supply Agreement, Western Wood cannot

declare a default based on Pellet Products’ failure to purchase all of the wood by-product

material that Western Wood produced. There is no evidence that Western Wood requested Pellet

Products’ plant manager to agree to Western Wood’s sale of overstock as provided in the

Agreement and as described above. Because Western Wood has not attempted to avail itself of

this additional provision, it cannot establish that Pellet Products wrongfully withheld its consent


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to Western Pellet’s sale of the “agreed upon overstock.” The Court, therefore, finds that Pellet

Products is not in default of the quantity requirements under the Second Supply Agreement.

Payment Terms: 3) failure to pay for by-product material in billed and unbilled amounts; and 4) failure to timely pay for wood by-product material The Second Supply Agreement does not include a due date for payments. To determine a

payment due date, the Court may look to the parties’ course of performance.18 Further, under

general contract law, “when an agreement does not specify a time for performance, it is implied

that it is to be performed within a reasonable time, and what is a reasonable time is a question of

fact.” Beaver v. Brumlow, 148 N.M. 172, 180, 231 P.3d 628, 636 (Ct. App. 2010)(citation

omitted).19 The Court may also imply a payment due date based on usage of trade, which

requires factual proof of “any practice or method of dealing having such regularity of observance

in a place, vocation, or trade as to justify an expectation that it will be observed with respect to

the transaction in question.” N.M.S.A. 1978 § 55-1-303(d)(2009 Cum. Supp.).

The parties’ course of performance indicates that Pellet Products would tally the total

weight of its finished product and compute the amount it owed to Western Wood on a monthly

basis. Pellet Products historically paid those amounts within 60 to 90 days, but on some

occasions paid Western Wood more than 90 days after the end of the month. Western Wood

consistently complained about the payment, but accepted all payments it received from Pellet

Products under the Second Supply Agreement. Pellet Products paid 60 to 90 days after month

end, not because of an agreement of the parties, but because of its financial difficulties. Mr. 18See J.R.Hale Contracting Co., Inc. v. United New Mexico Bank at Albuquerque, 110 N.M. 712, 718, 799 P.2d 581, 587 (1990)(“the UCC recognizes that the conduct of the parties in performing an agreement may be relevant to show a modification or waiver of a provision inconsistent with their conduct in the performance of that agreement.”)(emphasis in original). The Court may also look to the common law. See N.M.S.A. 1978 § 55-1-103(b)(2009 Cum. Supp.)(“Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity . . . supplement its provisions.”). 19See also Smith v. Galio, 95 N.M. 4, 7, 617 P.2d 1325, 1328 (Ct.App. 1980)(“Where a contract is silent as to the time of performance, the law implies that it is to be performed within a reasonable time.”)(citations omitted).


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Levengood testified that a 15-day payment due date following month end wood meet his

expectations. This evidence fails to establish an agreed upon payment due date under the Second

Supply Agreement.

The only evidence presented to the Court of a usage of trade respecting a payment due-

date was Mr. Walton’s testimony that a payment term of 45 days following month end would be

consistent with industry standards. However, there is no evidence before the Court that Mr.

Walton has personal knowledge of industry standards in the area of pellet production. His first

experience in this industry was his employment as manager of Pellet Products. Under the UCC,

evidence regarding usage of trade can only be admitted when the other party has been given

sufficient notice that such evidence will be presented. See N.M.S.A. 1978 § 55-1-303(g)(2009

Cum. Supp.)(“Evidence of a relevant usage of trade offered by one party is not admissible unless

that party has given the other party notice that the court finds sufficient to prevent unfair surprise

to the other party.”). The Court will not, therefore, imply a payment due date based on such

evidence of usage of trade. In sum, because there is insufficient evidence of the industry

standard or other evidence before the Court to serve as the basis for fixing a reasonable time for

payment, the Court cannot imply a payment due date absent additional evidence.20

Certain amounts remain outstanding under the Second Supply Agreement. As of January

9, 2012, the date Western Wood filed its bankruptcy petition, Western Wood’s records reflected

a balance of approximately $14,000 remained due from Pellet Products. See Exhibit 21

(reflecting balance of $14,323.00 on 12/16/11 and a balance of $8,883.00 on January 12, 2012).

Post-petition, Pellet Products paid Western Wood approximately $18,000. Id. (reflecting Credits

of $10,791.00 and $8,193.00 on April 9, 2012). The parties continued to operate under the

20In the event Western Wood decides to assume the Second Supply Agreement rather than reject it, the Court will consider additional evidence from which the Court can imply a payment due date term.


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Second Supply Agreement for a period of time after the filing of the bankruptcy case. Pellet

Products ceased production in mid-April 2012 as a result of Western Wood’s refusal to supply

Pellet Products with any additional wood-by-product material. At the time Pellet Products

ceased operations, approximately $27,000.00 remained due to Western Wood. Id. (reflecting a

balance as of April 30, 2012 of $27,165.00). Given that the outstanding balance as of the

petition date was approximately $14,000, and Pellet Products paid Western Wood approximately

$18,000.00 after the filing of the bankruptcy, the Court infers that the outstanding balance due

Western Wood under the Second Supply Agreement resulted primarily from production that

occurred from January to April 2012.

Based the parties’ course of performance the Court finds that Western Wood waived by

estoppel its right to declare a default under the Second Supply Agreement when it did based on

the amounts that remain due under the Supply Agreement. 21 It appears that the majority of the

outstanding amounts due Western Wood under the Second Supply Agreement are attributable to

production of pellets that occurred within 90 days of the date Western Wood refused to supply

Pellet Products wood by-product material. The parties’ course of performance demonstrates that

Western Wood consistently acquiesced in accepting payments from Pellet Products 60 to 90 days

after its end-of-month calculation of the amounts due, and sometimes longer. Western Wood

21 “To establish waiver by estoppel, the party asserting the doctrine must show that (1) the party to be estopped made a misleading representation by conduct; (2) the party claiming estoppel had an honest and reasonable belief based on that conduct that the party to be estopped would not assert a certain right under the contract or a defense thereto; and (3) the party claiming estoppel acted in reliance on the conduct to its detriment or prejudice.” THI of New Mexico at Hobbs Center, LLC v. Patton, 2012 WL 112216, *10 (D.N.M. Jan. 3, 2012), aff’d, __ Fed.Appx. __, 2012 WL 5992259 (10th Cir. Dec. 3, 2012)(citation omitted). See also Brown v. Taylor, 120 N.M. 302, 305, 901 P.2d 720, 723 (1995)(“‘To prove waiver by estoppel the party need only show that he was misled to his prejudice by the conduct of the other party into the honest and reasonable belief that such waiver was intended.’”)(quoting J.R. Hale, 110 N.M. at 717, 799 P.2d at 586). Accord Cafeteria Operators, L.P. v. Coronado-Santa Fe Associates, L.P., 124 N.M. 440, 952 P.2d 435, 440 (Ct. App. 1997). Waiver by estoppel applies under the Uniform Commercial Code. Cf. Premix-Marbletite Mfg. Corp. v. SKW Chemicals, Inc., 145 F.Supp.2d 1348, 1356 (S.D.Fla. 2001)(interpreting Florida’s UCC, stating that the parties’ course of performance “may become part of an agreement, via a type of estoppel, when one party fails to object to the manner with which the other party performs under the agreement.”).


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thereby waived the right to enforce compliance with a payment due date shorter than the 60 – 90-

day historical payment dates.

UCC § 2-209(5) addresses the right of a party who has made a waiver to retract the

waiver. It provides:

A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver. N.M.S.A. 1978 55-2-209(5) (1993 Repl. Pamp.).

Western Wood never gave Pellet Products notice that if Pellet Products failed to make payments

under the Second Supply Agreement within a certain time Western Wood would declare a

default under the Second Supply Agreement. Western Wood thus has not retracted the waiver.

Unless and until it retracts the waiver as to future payments, Western Wood may not declare that

late payments constitute a breach of the Second Supply Agreement.

“Pay-weight” Measurement: 5) failure to weigh the wood by-product material removed from Western Wood’s property for use in the pellet mill The Second Supply Agreement requires Pellet Products to purchase wood by-product

materials from Western Wood “at a rate of thirty dollars per dry ton.” See Second Supply

Agreement, ¶ 2. The Second Supply Agreement provides further that “$30.00 per dry ton is the

rate established for Bi-Products generated by the manufacturing of post and pole material.” Id.

The parties’ course of performance establishes that $30.00 per dry ton is the price for wood by-

product material to be purchased by Pellet Products under the Second Supply Agreement

regardless of whether the material is generated by the manufacturing of post and pole material or

other sawmill operations.


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The parties’ course of performance indicates that Pellet Products agreed to pay Western

Wood for the wood by-product material in the finished product based on the weight of the

finished product. Over the life of the First Supply Agreement and the Second Supply

Agreement, Mr. Levengood expressed concerns about the additional wood by-product material

Pellet Products used to fuel its dryers as well as waste that occurred during the pellet-

manufacturing process. Pellet Products appears to agree that the Second Supply Agreement

requires it to pay for all of the wood by-product material it uses. Yet, Pellet Products has not

paid for by-product material burned as fuel or wasted in its manufacturing process because the

parties could not reach agreement on how to measure the dry tons of material used for those

purposes.

It may be possible to resort to industry or trade usage to supply such an additional term in

the Supply Agreement. See N.M.S.A. 1978 § 55-2-202(a)(2009 Cum. Supp.)(agreement may be

supplemented with evidence of usage of trade); N.M.S.A. 1978 §55-1-303(c) and (e)(2009 Cum.

Supp.)(defining usage of trade and providing that usage of trade must be construed consistent

with the express terms of the agreement). It also may be possible to establish a method to

measure by-product material used for fuel and lost as waste in the manufacturing process by

scientific evidence. But the evidence now before the Court is insufficient to supply that term.22

By accepting payment based on the weight of Pellet Products’ finished product, Western

Woods has waived by estoppel its right to assert that Pellet Products breached the Second Supply

Agreement by failing to pay for the wood by-product material used to fuel its dryers and lost as

waste as part of its manufacturing process. The parties’ course of performance establishes that

Western Wood continued to accept payment under the Second Supply Agreement based on a dry

22In the event Western Wood decides to assume the Second Supply Agreement rather than reject it, the Court will consider additional evidence from which the Court can imply a surcharge term to account for the additional wood by-product material used for fuel and lost to waste in the manufacturing process.


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ton of finished product. Consequently Pellet Products’ failure to pay for wood by-product

material used for fuel and lost to waste in the manufacturing process does not constitute a default

under the Second Supply Agreement. As this point, a retraction of the Western Wood’s waiver

must be prospective only due to the nature of Pellet Products’ detrimental reliance on the waiver.

Miscellaneous: 6) removal of material without permission from Western Wood

In addition, the evidence does not support a finding that Pellet Products impermissibly

removed material from Western Wood’s property. Until Western Wood finally refused to supply

its wood by-product material to Pellet Products, the parties’ course of performance under the

Second Supply Agreement indicates that Pellet Products routinely obtained the wood by-product

material from Western Wood’s property with it permission. After Western Wood’s final refusal

to supply its wood by-product material to Pellet Products, Western Wood’s representative

testified that he never saw anyone from Pellet Products come on to Western Wood’s property

and remove by-product material.

B. The Lease

Western Wood alleges that Pellet Products has defaulted under the Lease based on Pellet

Products’ failure to timely pay the 2012 rent, failure to insure the pellet mill, failure to perform

under the Second Supply Agreement, and failure to obtain an air quality permit. The Court has

already determined that Pellet Products did not breach the Second Supply Agreement. For the

reasons stated below, the Court finds that Pellet Products has not defaulted under the Lease.

Under New Mexico law, “waivers may be implied by a course of conduct which, in turn,

will estop the one who waives from asserting the right waived.” Easterling v. Peterson, 107

N.M. 123, 124, 753 P.2d 902, 903 (1988)(citations omitted). A waiver is generally defined as an

intentional relinquishment of a known right. See Brannock v. Brannock, 104 N.M. 385, 385,


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722 P.2d 636, 636 (1986)(defining waiver as “‘the intentional abandonment or relinquishment of

a known right.’”)(quoting Brown v. Jimerson, 95 N.M. 191, 192, 619 P.2d 1235, 1236 (1980)).

Where one party to a contract has by his own conduct consistently failed to demand strict

compliance with the terms of the contract, such as by accepting late payments, such party must

give adequate notice to the other party of the intent to insist upon strict compliance in order to

overcome a waiver by conduct and declare a default. Easterling, 107 N.M. at 124, 753 P.2d at

905 (citing Fisher v. Tiffin, 275 Or. 437, 551 P.2d 1061 (1976) and Dillingham Commercial Co.

v. Spears, 641 P.2d 1 (Alaska 1982)(remaining citation omitted)).23

Here, the rental payment under the Lease is the nominal amount of $100 per year due

February 1. Mr. Levengood could not recall whether Pellet Products paid the rent for the years

2008 through 2010. He testified that he was focused at that time on getting the plant up and

running, and because the amount is such a small sum, he might not have realized if it had not

been paid. For 2012, Pellet Products tendered the rent on January 31, 2012, though Western

Wood’s record of all transactions with Pellet Products does not reflect this payment. See Exhibit

V (General Ledger for Pellet Products reflecting $100.00 payment dated January 31, 2012 for

“Lease Agreement between WWP and WPP”); Exhibit W. Mr. Levengood acknowledged that

the 2012 rent “was delivered at some time.”

The Lease includes a requirement that Pellet Products, as tenant, “shall not use the

premises during the term hereof for any purpose contrary to the laws of the State of New Mexico

or the United States.” See Exhibit C. The Lease does not include a specific term requiring Pellet

Products to obtain an air quality permit or exemption for air quality permit. Mr. Levengood

23Cf. Westinghouse Credit Corp. v. Shelton, 645 F.2d 869, 873 (10th Cir. 1981)(construing a retail installment contract for a mobile home under the Oklahoma UCC, and observing that “courts have uniformly held that a creditor may not fall into a pattern of accepting delinquent installments and then suddenly declare default, without first apprising the debtor of his insistence on strict compliance with the terms of the contract.”)(citations omitted).


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testified that Western Wood holds an air quality permit exemption. Mr. Pillmore testified that

Pellet Products does not have an air quality permit or exemption, but that based on conversations

with Mr. Levengood, he thought that Pellet Products may not need to obtain an air quality

permit. Mr. Pillmore further testified that one of Pellet Products’ investors had done some

investigation to determine whether Pellet Products needed an air quality permit, but Mr. Pillmore

did not know the outcome of that investigation.

Until Western Wood hired an attorney who sent the Letter to Pellet Products alleging

defaults under the Lease, Western Wood had not given Pellet Products any indication that it

believed Pellet Products was in default under the terms of the Lease. The Letter asserted, among

other things, that Pellet Products failed to maintain insurance contrary to the terms of the Lease.

See Exhibit 36. Upon receipt of the Letter, Pellet Products provided Western Wood proof of

insurance. The Letter was later retracted. See Exhibit T.

Under these circumstances, the Court concludes that Pellet Products has not defaulted

under the Lease. Over the life of the Lease, Western Wood was not particularly concerned with

timely receipt of rental payments. Thus, even if Pellet Products’ payment of the 2012 rent was

untimely (and the evidence indicates it may have, in fact, been tendered in a timely fashion), the

untimeliness of the nominal rental payment for 2012 is insufficient to constitute a present default

under the Lease. The Letter, which indicated that Western Wood was intending to strictly

enforce the terms of the Lease, was later retracted. See Exhibit 36 and Exhibit T. The evidence

indicates that Pellet Products has insured the leased premises and that the insurance policy names

Western Wood as an additional insured. The evidence presented regarding the need for Pellet


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Products to obtain an air quality permit was inconclusive, and, therefore, insufficient to form the

basis of a default.24

Even if Pellet Products is required to obtain an air quality permit, to retract its waiver of

enforcement of the Lease term requiring Pellet Products not to use the leased premises “for any

purpose contrary to the laws of the State of New Mexico,” Western Wood must give Pellet

Products reasonable notification of its intent to enforce strict compliance with any requirement to

obtain an air quality permit or exemption from the State of New Mexico.25 What is reasonable

will depend on the time it reasonably would take Pellet Products to come into compliance.

C. Damages

By withholding wood by-product material from Pellet Products and refusing to allow

Pellet Products to take any more wood by-product material from the piles of material located on

Western Wood’s sawmill property, Western Wood breached the Second Supply Agreement. A

purchaser of goods under a contract governed by the UCC may be entitled to recover

consequential damages resulting from the seller’s breach. See N.M.S.A. 1978 §§ 55-2-714(3)

and 55-2-715(2) (1993 Repl. Pamp.).26 “Consequential damages are compensation for harm to

the buyer as a consequence of not having the seller’s promised performance . . . . and may

encompass harm to . . . property of the buyer other than the goods.” The ABCs of the UCC

(Revised) Article 2: Sales, at 156.

24In the Pre-Trial Order Western Wood also requested the Court to determine which fixtures built by Pellet Products on the leased premises are part of the real estate. The Lease itself addresses this question. It provides: “All fixtures built by the tenant except the buildings, shall not merge with the real estate, but shall remain the property of tenant.” Exhibit C. Under the plain language of this provision, only the buildings become part of the real estate. Western Wood provided no other evidence at trial regarding this issue. 25Cf. N.M.S.A. 1978 § 55-2-209(5)(1993 Repl. Pamp.)(requiring a party who has waived an executory portion of a contract governed by the UCC to give “reasonable notification [to the other party] . . . that strict performance will be required of any term waived”). 26 The Second Supply Agreement contains no limitation or exclusion of consequential damages, even though such limitation s and exclusions generally are permitted under Article 2 of the UCC. See § 55-2-719(3).


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Consequential damages recoverable under the UCC consist of “any loss resulting from

general or particular requirements and needs of which the seller at the time of contracting had

reason to know and which could not have been prevented by cover or otherwise.” N.M.S.A.

1978 § 55-1-715(2)(a)(1993 Repl. Pamp.). Consequential damages should be allowed if (i) the

damages were reasonably foreseeable by the seller27; (ii) the damages are not reasonably

avoidable by cover or otherwise;28 and (iii) the amount of loss may be determined in any manner

which is reasonable under the circumstances.29

(i) Foreseeability

Pellet Products’ location right next to Western Wood’s sawmill was the primary reason

for starting up its wood pellet business since it ensured easy access to the material it needed to

manufacture its products. Mr. Pillmore testified that it would be cost-prohibitive to purchase

wood by-product material from some other source because of the delivery costs. Western Wood

had reason to know both when the Second Supply Agreement was made and when it stopped

deliveries that by refusing to supply wood by-product material to Pellet Products it would cause

Pellet Products to shut down its business operations and Pellet Products would lose the value of

its business and assets as a going concern.

(ii) Avoidability

It would be cost-prohibitive for Pellet Products to purchase wood by-product material

from some other source than Western Wood because of the delivery costs. As a result Pellet

Products cannot avoid suffering consequential by any reasonable purchase of or contract to purchase

27See N.M.S.A. 1978 § 55-1-715(2)(a)(1993 Repl. Pamp.)regarding foreseeability of loss requirement ). See also, Sunnyland Farms, Inc. v. Central New Mexico Elec. Coop., Inc., 149 N.M. 746, 755-756, 255 P.3d 324, 333-334 (Ct. App. 2011)(regarding foreseeability of damages). 28 “Cover” is defined as the buyer “making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.” N.M.S.A. 1978 § 55-1-712(1)(1993 Repl. Pamp.). 29See N.M.S.A. 1978 § 55-1-715 (1993 Repl. Pamp.)(Official Comment 4 regarding proof of loss).


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wood by-product material in substitution for those due from the Western Wood under the Second

Supply Agreement.

(iii) Proof of Loss

In general, the measure of a party’s compensatory damages is the loss the party has

suffered as a result of the other party’s breach. Central Sec. and Alarm Co. v. Mehler, 121 N.M.

840, 846, 918 P.2d 1340, 1346 (Ct.App. 1996)(“The purpose of compensatory damages is to

make the injured party whole by compensating it for losses.”)(citation omitted); Fredenburgh v.

Allied Van Lines, Inc., 79 N.M. 593, 596, 446 P.2d 868, 871 (1968)(“The measure of damages

should be that which fully and fairly compensates for the injuries received.”)(citations omitted).

At the time that Western Wood refused to supply Pellet Products with wood by-product

material, Pellet Products could not operate its large pellet mill because the large bearing had

failed. Had Western Wood not breached the Second Supply Agreement, Pellet Products would

have continued to manufacture pellets on its smaller pellet mill on the leased property, and on its

larger pellet mill upon repair of the bearing.

The evidence presented at trial established that the value of Pellet Products’ equipment

installed in its pellet mills is $800,000 if sold as part of an operating pellet manufacturing

facility, but that, if the equipment is removed, the value is $400,000. Mr. Pillmore testified that

Pellet Products received an offer to purchase its pellet manufacturing business for $4 million, but

no other evidence was offered to support his testimony. There is no evidence that the offer was a

bona fide offer made by a purchaser financially capable of closing, or of any of the other terms

or conditions of the offer. Pellet Products proffered no other evidence of the value of its

business. Consequently, the Court finds that there is insufficient evidence to support Pellet

Products’ position that its business is worth $4 million as a going concern. Pellet Products can


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remove its equipment from the leased premises, but the equipment will lose half of its value.

Thus, the Court fixes the appropriate damages if the Supply Agreement and Lease are rejected at

$400,000.

(iv) Allowed Non-Priority Unsecured Claim Upon Contract Rejection

In the event the Court approves Western Wood’s request to reject the Second Supply

Agreement and the Lease, Pellet Products would hold a non-priority unsecured claim against the

bankruptcy estate in the amount of $400,000. See 11 U.S.C. 365(g)(rejection of an executory

contract constitutes a breach); In re Valley View Shopping Center, L.P., 260 B.R. 10, 25

(Bankr.D.Kan. 2001)(“A debtor’s rejection of an unexpired lease or executory contract

constitutes a breach under § 365(g), which gives rise to a ‘claim’ for damages in favor of the

non-debtor party. This ‘claim created by the rejection is afforded treatment similar to other

unsecured claims.”)(citing In re National Gypsum Co., 208 F.3d 498, 507 (5th Cir. 2000)). See

also In re American HomePatient, Inc., 414 F.3d 614, 620 (6th Cir. 2005)(rejection damages are

generally determined under applicable state law).

D. The Automatic Stay

Western Wood included in the Pre-Trial Order a claim for violation of the automatic stay

under 11 U.S.C. §362(a)(3). Section 362(a)(3) prohibits “any act to obtain possession of

property of the estate or of property from the estate or to exercise control over property of the

estate.” 11 U.S.C. § 362(a)(3).30 Western Wood requests the Court to award a sanction based

on Pellet Products’ continued post-petition removal of wood by-product material from Western

Wood. The Court declines to do so. There is no evidence that Pellet Products violated the

30A willful violation of the automatic stay occurs when a party knows that the automatic stay is in effect and takes an intentional action that violates the stay. See, Johnson v. Smith (In re Johnson), 501 F.3d 1163, 1172 (10th Cir. 2007)(to establish a willful violation of the automatic stay, the debtor must demonstrate “that the creditor knew of the automatic stay and intended the actions that constituted the violation; no specific intent is required.”)(citations omitted).


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automatic stay. To the contrary, the evidence establishes that, post-petition, representatives of

Western Wood alternatively told representatives of Pellet Products that Pellet Products could

remove, or could not remove wood by-product material from the piles located on Western

Wood’s property. There is no evidence that Pellet Products took any by-product material after

Western Wood stopped supplying Pellet Products with the material.

E. Rejection of the Second Supply Agreement and the Lease

Western Wood seeks to reject the Second Supply Agreement and the Lease under 11

U.S.C. § 365(a). Under this section, a debtor in possession may assume or reject an unexpired

lease or executory contract, subject to approval by the bankruptcy court. Id. Section 365 allows

“a debtor to reject executory contracts in order to relieve the estate of burdensome obligations[.]”

In re Penn Traffic Co., 524 F.3d 373, 382 (2nd Cir. 2008)(quoting Frito-Lay, Inc. v. LTV Steel

Co., Inc. (In re Chateaugay Corp.) 10 F.3d 944, 954-55 (2nd Cir. 1993)(additional citation and

internal quotation marks omitted)). The “business judgment” standard is the appropriate

standard for determining whether a debtor in possession’s decision to reject an unexpired lease or

executory contract should be approved.31 In applying this standard, the Court acts as an

“overseer of the wisdom with which the bankruptcy estate’s property is being managed by the

trustee or debtor-in-possession, and not, as it does in other circumstances, as the arbiter of

disputes between creditors and the estate.” Orion Pictures Corp. v. Showtime Networks, Inc. (In

re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2nd Cir. 1993). Deference is given to the debtor in

31See In re Pomona Valley Medical Group, Inc., 476 F.3d 665, 670 (9th Cir. 2007)(in evaluating a debtor in possession’s decision to reject an executory contract, the court “‘applies the business judgment rule’”)(quoting Durkin v. Benador Corp. (In re G.I. Indust., Inc.), 204 F.3d 1276, 1282 (9th Cir. 2000)(remaining citations omitted); Valley View, 260 B.R. at 39. See also, In re Tilco, Inc., 558 F.2d 1369, 1373 (10th Cir. 1977)(applying former Bankruptcy Act, and finding that the court must exercise its business judgment to assess whether the debtor in possession should reject/assume).


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possession’s decision to reject an executory contract or unexpired lease.32 The impact that

rejection of an executory contract or unexpired lease may have on the estate and a debtor in

possession’s prospect of confirming a plan, including the effect of the resulting rejection

damages claim, is relevant to the determination of whether the Court should approve rejection.33

Generally, the Court should not interfere with the debtor in possession’s exercise of business

judgment to reject a lease or executory contract unless the decision is “so manifestly

unreasonable that it could not be based on sound business judgment[.]” Lubrizol, 756 F.2d at

1047.34

Western Wood seeks to reject both the Second Supply Agreement and the Lease. Under

the business judgment standard, the Court must give some deference to Western Wood’s

decision. However, Western Wood proposed to reject the Second Supply Agreement and the

Lease based on its belief that Pellet Products had breached the Second Supply Agreement and

had defaulted under the Lease. The Court has now determined the opposite: Pellet Products has

not breached the Second Supply Agreement and has not defaulted under the Lease. In order to

evaluate Western Wood’s decision to reject, the Court needs additional evidence from Western

Wood regarding its business judgment that takes into account the Court’s determination that

32See Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1046 (4th Cir. 1985)(“the bankrupt’s decision . . . is to be accorded the deference mandated by the sound business judgment rule”). 33See Valley View, 260 B.R. at 39 (stating that the determination of whether to approve a motion to assume an executor contract or unexpired lease “must include a consideration of the effects that assumption would have on the debtor; the implications for the lessor; the benefit or detriment to unsecured creditors; and the significance of the lease to the debtor’s reorganization.”)(citation omitted); In re Chira, 367 B.R. 888, 898 (S.D.Fla. 2007)(finding that the bankruptcy court appropriately considered the potential rejection claim and consequential damages in applying the business judgment test to evaluate (and ultimately approve) a request to assume an executory contract). See also, Int’l Broth. of Teamsters, Chauffeurs, Warehousemen and Helpers of America v. IML Freight, Inc., 789 F.2d 1460, 1462 and 1463 (10th Cir. 1986)(observing that “the controlling question is whether the hardships imposed [by rejection of the executory contract] are outweighed by a reasonable expectation of successful reorganization[]” and recognizing that “the rejections could generate burdensome claims against the estate”) 34See also Pomona Valley, 476 F.3d at 670 (stating that the court should approve a debtor in possession’s rejection of an executor contract “unless it fines that the debtor-in-possession’s conclusion that rejection would be ‘advantageous is so manifestly unreasonable that it could not be based on sound business judgment, but only on bad faith, or whim or caprice.’”)(quoting Lubrizol, 756 F.2d at 1047).


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Pellet Products has not breached the Second Supply Agreement and has not defaulted under the

Lease and the amount of the allowed claim Pellet Products will hold if rejection occurs. The

Court will, therefore, schedule a continued hearing on Western Wood’s Motion to Reject if

Western Wood still wishes to reject the Supply Agreement and Lease. A separate judgment

consistent with the Court’s Memorandum Opinion will be entered.

_______________________________________ ROBERT H. JACOBVITZ United States Bankruptcy Judge Date entered on docket: April 4, 2013 COPY TO: William F. Davis Attorney for Western Wood Products, Inc. 6709 Academy NE, Suite A Albuquerque, NM 87109

William R. Keleher Spencer Lewis Edelman Attorneys for Western Pellet Products, LLC PO Box 2168 Albuquerque, NM 87103-2168


western wood products, inc. v. western pellet products, llc

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